UAE Financial Rules and Regulations Ed3 PDF 2021

UAE Financial Rules and Regulations SCA & CISI 3rd Edition 2021 This workbook relates to syllabus version 3.0 and will cover exams to 30 April 2023 www.sca.gov.ae Toll Free 800722823 xxxxxxxxxxxx Welcome to The UAE Financial Rules and Regulations study material created by the Chartered Institute for Securities & Investment and association with Securities and Commodities Authority Training Centre. Published by: Chartered Institute for Securities & Investment © Chartered Institute for Securities & Investment 2021 20 Fenchurch Street , London EC3M 3BY, United Kingdom Tel: +44 20 7645 0600 Fax: +44 20 7645 0601 Email: [email protected] www.cisi.org/qualifications This workbook edition has been reviewed by the team at the Securities & Commodities Authority (SCA). This is an educational workbook only and the Chartered Institute for Securities & Investment accepts no responsibility for persons undertaking trading or investments in whatever form. While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner. Warning: any unauthorised act in relation to all or any part of the material in this publication may result in both a civil claim for damages and criminal prosecution. A learning map, which contains the full syllabus, appears at the end of this workbook. The syllabus can also be viewed on cisi.org and is also available by contacting the Customer Support Centre on +44 20 7645 0777. Please note that the examination is based upon the syllabus. The questions contained in this workbook are designed as an aid to revision of different areas of the syllabus and to help you consolidate your learning chapter by chapter. Workbook version: 3.1 (April 2021) Important – Keep Informed on Changes to this Workbook and Examination Dates Changes in industry practice, economic conditions, legislation/regulations, technology and various other factors mean that practitioners must ensure that their knowledge is up to date. At the time of publication, the content of this workbook is approved as suitable for examinations taken during the period specified. However, changes affecting the industry may either prompt or postpone the publication of an updated version. It should be noted that the current version of a workbook will always supersede the content of those issued previously. Keep informed on the publication of new workbooks and any changes to examination dates by regularly checking the CISI’s website: cisi.org/candidateupdate Learning and Professional Development with the CISI The Chartered Institute for Securities & Investment is the leading professional body for those who work in, or aspire to work in, the investment sector, and we are passionately committed to enhancing knowledge, skills and integrity – the three pillars of professionalism at the heart of our Chartered body. CISI examinations are used extensively by firms to meet the requirements of government regulators. Besides the regulators in the UK, where the CISI head office is based, CISI examinations are recognised by a wide range of governments and their regulators, from Singapore to Dubai and the US. Around 50,000 examinations are taken each year, and it is compulsory for candidates to use CISI workbooks to prepare for CISI examinations so that they have the best chance of success. Our workbooks are normally revised every year by experts who themselves work in the industry and also by our Accredited Training Partners, who offer training and elearning to help prepare candidates for the examinations. Information for candidates is also posted on a special area of our website: cisi.org/candidateupdate. This workbook not only provides a thorough preparation for the examination it refers to, it is also a valuable desktop reference for practitioners, and studying from it counts towards your Continuing Professional Development (CPD). Mock examination papers, for most of our titles, will be made available on our website, as an additional revision tool. CISI examination candidates are automatically registered, without additional charge, as student members for one year (should they not be members of the CISI already), and this enables you to use a vast range of online resources, including CISI TV, free of any additional charge. The CISI has more than 40,000 members, and nearly half of them have already completed relevant qualifications and transferred to a core membership grade. You will find more information about the next steps for this at the end of this workbook. Foreword On January 29, 2000 HH UAE President issued a federal decree to set up a jurisdictional authority in the UAE’s capital, which was called ‘Securities & Commodities Authority’ (SCA). The Authority enjoys a legal entity, financial and administrative independence with the control and executive powers necessary for it to discharge its tasks in line with the provisions of the SCA 2000 law and the regulations issued in implementation thereof, noting that the authority reports to the minister of Economy. SCA’s mission is to ensure compliance with the best international practices and standards in order to protect investment in the capital markets and consolidate the stability of the national economy. By continuously upgrading the supervisory legislation to be implemented in an integrated framework, SCA ensures transparency, integrity and justice in the operation of the markets, as well as the development of investor awareness in the UAE. The CISI is a leading professional body for the securities and investment industry in the UK and a growing number of major financial centres around the world. The CISI set a range of vocational qualifications ranging from International Introduction to Investments to Operational Risk and Investment Management. CISI examinations are used extensively by firms to meet the requirements of the UK regulator, the FSA, and are increasingly being recognized by international regulators. CISI has a significant voice in the industry, standing for professionalism, excellence and the promotion of trust and integrity. This official learning manual ensures that candidates gain a comprehensive understanding of the assigned examination content. The material is written and updated by industry specialists and reviewed by senior figures in the financial services industry, whilst quality is assured through a rigorous editorial system of practitioner panels and boards. The SCA is delighted to have an Agreement on Training and Qualification Services with the CISI to deliver a series of prescribed examinations to appropriate market practitioners. This learning manual not only provides a thorough preparation for the appropriate examination, but is also a valuable desktop reference point. Dr. Maryam Buti Al Suwaidi Deputy Chief Executive Officer Securities & Commodities Authority The Regulatory Infrastructure............................ 1 1 Associated Market and Securities Legislation and Practice.......... 29 2 Investment Funds................................... 55 3 Markets.......................................... 81 4 Anti-Money Laundering, Combating the Financing of Terrorism and 121 5 Illegal Organisations................................. Client Protection.................................... 141 6 Trading.......................................... 157 7 Dubai Financial Market (DFM)............................ 189 8 Glossary.................................................... 209 Multiple Choice Questions..................................... 215 Syllabus Learning Map........................................ 257 It is estimated that this workbook will require approximately 100 hours of study time. 1 Chapter One The Regulatory Infrastructure Introduction 3 1. Federal Law of No. 4 of 2000 3 2. Securities & Commodities Authority (SCA) 9 3. SCA Resolutions 14 4. Corporate Governance 18 5. Codes of Conduct 23 This syllabus area will provide approximately 7 of the 100 examination questions 2 The Regulatory Infrastructure Introduction 1 This chapter introduces the regulatory infrastructure established by Federal Law No. 4 that created the Securities & Commodities Authority (SCA). It covers the SCA’s functions and powers, including the requirements relating to membership and the need for securities and commodities markets in the UAE to be licensed by the SCA. 1. Federal Law of No. 4 of 2000 1.1 The Securities & Commodities Authority (SCA) Learning Objective 1.1.1 Understand the functions of the Securities & Commodities Authority (SCA) (Federal Law No. 4 of 2000 Part 1, Chapter 1–3, Articles 1–19): incorporation of SCA; organs of the SCA and its membership; SCA’s financial affairs The Securities & Commodities Authority (SCA) of the United Arab Emirates was established by Federal Law No. 4 of 2000. It was incorporated as a public authority in Abu Dhabi, the State’s capital. The SCA is a separate legal personality with financial and administrative independence, which has the supervisory and executive powers necessary to perform its functions. It reports to the Cabinet of Ministers. The SCA’s purpose is based on achieving the following objectives: 1. to provide the opportunity to invest savings and funds in securities and commodities in a manner that: ensures the interest of the national economy, secures the integrity and accuracy of transactions ensures prices are determined by means of supply and demand, and protects investors by establishing the bases for sound and just dealings between market participants 2. to develop investment awareness by conducting research and reporting the findings and recommendations 3. to ensure financial and economic stability. The SCA is not permitted to: enter into commercial activities have private interests of its own in any undertaking, or own or issue securities. The SCA may establish branches or offices to carry out the functions of supervision and control over the securities and commodities markets licensed in the UAE. 3 Under Article 4 of Federal Law No. 4 of 2000, the SCA has been given the following powers to enable it to meet its objectives: 1. To propose regulations concerning: a. functioning of the SCA b. licensing and monitoring of the markets, and c. acceptance, listing, and cancelling or suspending the listing of any securities or commodities from being traded in the markets. All these regulations are to be issued by resolution of the Cabinet of Ministers. 2. In consultation and co-ordination with the markets licensed in the State, create regulations concerning: a. functioning of the market b. brokers and the regulating of their functions c. trading, clearance, settlement, transfer of ownership and custody of securities d. membership of the market e. disclosure and transparency, and f. arbitration in disputes arising from trading in securities and commodities. 3. To form specialist technical committees, and to specify the scope of their work and their remuneration. 4. To maintain contact with international markets in order to obtain and exchange information and know-how, and to join relevant Arab and international organisations and federations. 5. To perform all other acts which assist in achieving the Authority’s objectives or the exercise of its powers in accordance with the law. 1.1.1 The Organs of the SCA and their Competencies The SCA is managed by a board of directors, and the board is based on a resolution from the Cabinet of Ministers. The resolution of the Cabinet of Ministers determines the chairman of the board, the remunerations of the board members, the mechanism for holding meetings and taking decisions. The Cabinet further decrees that the SCA is chaired by the Minister of Economy and includes five well experienced members nominated by the chairman and the chief executive. The period in office – with the exception of the chief executive, SCA board members are appointed for four years, renewable once. In the event of a member stepping down prior to the end of that member’s term, a successor will be appointed for the remaining period of the original term. Ownership of securities – upon joining the board, every member has to declare to the SCA the securities owned by himself, his spouse and minor children as well as any holdings with any broker. In addition, any changes in these holdings during his period in office need to be declared within one week after he is made aware of the change. All declarations need to be made in writing. Immediate termination of membership – members have to forfeit their membership in the following events: conviction of an offence of dishonour or breach of trust bankruptcy, or failure to attend three consecutive meetings without an acceptable excuse. Frequency of board meetings – the board should meet at least four times a year or as required by the chairman’s invitation. A written invitation including the agenda is required to be sent in sufficient time prior to the date of the meeting. 4 The Regulatory Infrastructure Validity of board meetings – board meetings are deemed valid if they are attended by the majority 1 of the members. The chairman, or his deputy have to be in attendance. Resolutions – passed by a majority of the votes of the members present at the meeting. In the event the vote is undecided (ie, for and against have the same number of votes) the person chairing the meeting has the deciding vote. 1.1.2 Responsibilities of the Board of Directors 1. Ensure that the regulations of Article 4 of Federal Law No. 4 of 2000 and subsequent amendments are applied. 2. Collect notifications and complaints relating to the activities of the markets or brokers and take appropriate actions within the provisions of the Law and the regulations issued. 3. Ensure markets and brokers submit balance sheets, profit and loss accounts, and annual financial statements audited by an accredited auditor, within one month following the end of the financial year. 4. Ensure markets have adequate disclosure rules in place related to any substantial developments that occur in relation to the companies listed on that market and that these rules are adhered to. 5. Ensure transparency and disclosure as prescribed in the Law and the resolutions implementing it. 6. Issue and maintain resolutions concerning membership of the markets as well as concerning trading in securities and commodities in accordance with the provisions of the Law and the regulations issued pursuant thereto. 7. Undertake all other acts which assist the board in achieving the objectives of the SCA. On a six-monthly basis, the board reports on the markets’ activities to the Cabinet of Ministers. The SCA is supported by the necessary administrative functions headed up by a full-time chief executive with the rank of undersecretary and a deputy with the rank of assistant under secretary. Both are appointed pursuant to a federal decree upon the proposal of the board. All regulations applicable to SCA employees equally apply to the chief executive and his deputy. 1.1.3 The SCA’s Financial Affairs The chief executive prepares the annual budget which is approved by the board. The fiscal year runs from the first of January until the end of December each year. The SCA’s sources of income consist of the following: 1. Annual funds allotted by the federal government. 2. Income which accrues under the regulations from the following: a. listing fees and annual fees levied on the companies and the brokers in the markets b. fees levied on trading, and fees for the services rendered by the markets c. fines levied on brokers and companies whose securities are listed for trading, and any other fines. The SCA is required to keep regular books of account in order to monitor its operations and reflect its true financial position in accordance with the accounting rules and regulations of the State. 5 The SCA has one or more auditors from among the statutory accountants entered on the roll of practising auditors. An annual board resolution is passed for the appointment of the auditors, and the determination of their fees. 1.2 The Markets Learning Objective 1.1.2 Understand the establishment and administration of the securities and commodities market Federal Law No.4 of 2000 enabled the establishment of markets for trading in securities and commodities in the UAE. Each market has to take the form of a local public establishment or a public joint-stock company licensed by the SCA. Markets have to be reciprocally and electronically linked at State level. Markets in the form of local public establishments, have to be administered by a board of directors, which is constituted in accordance with a resolution by the local competent authority. None of the members of the market’s board may be on the board of directors of a public joint-stock company or a financial broker. In addition, like the SCA members of the board, any member of the board of a market must step down in the event of: conviction of: offence of dishonour breach of trust declared bankrupt failure to attend three consecutive meetings without an acceptable excuse. For markets in the form of a public joint-stock company, the board of directors has to be elected in accordance with the provisions of the Commercial Companies Law and its internal regulations. Ownership of securities – the market’s chairman, board members, general manager and his deputy have to declare the securities owned by himself, his spouse and minor children as well as any holdings with any broker. In addition, any changes in these holdings during his period in office need to be declared within one week after he is made aware of the change. All declarations need to be made in writing. The market’s board of directors is responsible for, and has to be sufficiently competent, to the following: 1. Appoint the market’s general manager and his deputy. 2. Establish the organisational structure and annexes, the internal regulations and all administrative rules and instructions. 3. Monitor the trading transactions in securities and commodities on a daily basis to ensure justice between transacting parties. 4. Present reports and data to the SCA and issue the necessary press releases to ensure transparency of information and disclosure. 6 The Regulatory Infrastructure Like the SCA, the markets are financed from the following sources: 1 1. Listing fees and annual fees levied on companies and brokers in the market. 2. Fees levied on trading and for the services rendered by the market. 3. Any fines levied on brokers or companies whose securities are listed for trading. The markets are required to keep records of all transactions in securities listed on the market. Any transactions in listed securities outside the market need to be reported to the market by the company in accordance with the rules in force issued by the board of that market. Transactions in securities listed on the market not recorded according to these provisions and the regulations and resolutions issued are null and void. 1.3 Clearing, Settlement, Transfer of Ownership and Custody Learning Objective 1.1.3 Understand the application of Federal Law No. 4 of 2000 (Part 2, chapter 3–4, Articles 30–32) to: clearing; settlement; transfer of ownership; custody Federal Law No. 4 also includes a number of further provisions under the headings of ‘Clearing, Settlement, Transfer of Ownership and Custody’ and ‘Supervision and Inspection Procedures’. These are as follows: Securities Price Information – all securities and commodities prices need to be displayed in accordance with the market’s regulations. Ownership transfer – transfer of ownership of securities, the registration thereof and custody agreements have to be in accordance with the market’s regulations. The issuer of securities is required to carry out its part of the procedures for transfer of ownership without delay. Suspending of trading – the market’s board may resolve to temporarily suspend all trading in the market, the trading in shares of a company, or transactions in any securities. In order to suspend trading, the majority of the members of the board must be present. The board can decide to suspend trading in exceptional circumstances or when circumstances arise that threaten the proper and regular working of the market. Suspending or reinstating rules or regulations – the market’s board may resolve to freeze, suspend or bring back into force any rules or regulations relating to the market or any of its operations. In order to do so, the majority of the board must be present. Sanctions – the SCA board has the right to impose sanctions on a market when it fails to pay any amounts due to the SCA. The sanctions are ranked in the following order: 1. Warning – a warning can be given to the market explicitly stating which financial requirement has been violated. 2. Notice to rectify – the SCA can serve a notice to the market to rectify the cause of the violation within 30 days of the date of the notice. 3. Penalty – the SCA can levy a penalty for delay of payment and when determining the penalty, a part-month shall be considered as a full month. 4. Suspension – the SCA may temporarily suspend a market from operation in the event until the fees are paid. Alternatively, the matter may be brought before the board to decide on any other course of action. 7 1.4 Disclosure and Transparency Learning Objective 1.1.4 Understand the application of Federal Law No. 4 of 2000 (Part 2, Chapter 5, Articles 33–39) to Disclosure and Transparency: board’s powers; price sensitive information; dealings by the chairman, directors and staff; inside information The board may require any person, natural or juristic, that has a connection with activities in securities, to publicly or privately disclose these activities, and to submit any information related to his activity. As part of its duties, the board may order any necessary investigation to be conducted associated with the implementation of the law and the subsequent resolutions thereto. Companies whose securities are listed need to immediately make any price sensitive information available to the market. The board of directors of the market has the right to publish the information provided in the local press and other media as appropriate. In order to ensure transaction integrity and investor confidence, listed companies need to provide any explanatory information relating to their activities and circumstances on request. Falsifying information in order to manipulate the market value of securities and the investor’s decision making process is not permitted. Equally not permitted is the use of insider information in purchase and sale transactions for personal gain. Any transactions executed that are in breach with these provisions are null and void. Any employee of a listed company, including the chairman, members of the board and the general manager are allowed to buy or sell shares in the company either direct or via a broker, under the following conditions: approval of the transaction by the board of directors, and disclosure of the transaction, including details of the quantity, price and other details required to the market. Any transaction by employees not approved or disclosed are null and void. In addition, the spreading of rumours related to the purchase and sale of transactions in not permitted, and transactions associated with this are null and void. 8 The Regulatory Infrastructure 2. Securities & Commodities Authority (SCA) 1 2.1 The Functioning of the Securities & Commodities Authority Learning Objective 1.2.1 Understand the regulations as to the functioning of the Securities & Commodities Authority (Cabinet of Ministers Resolution 2000–13 dated 3 July 2000): public authority; objectives and powers; organs of SCA and their competencies; administration; and finances 2.1.1 Public Authority, Objectives and Powers As seen in section 1, the SCA is a public authority with a separate legal personality, financial and administrative independence, and the supervisory and executive powers necessary to perform its functions. Its objectives have already been outlined and include the requirement to provide a suitable climate for the investment of savings and funds in securities and commodities in a manner that serves the interest of the national economy, secures integrity of transactions and protects investors. In achieving its objectives, the SCA has a range of powers, including defining regulations, supervising and monitoring of the markets, the licensing of markets and brokers, and authorising securities and commodities to be listed for trading in the market. In addition, the SCA has the power to remove brokers from the registers of licensed brokers. 2.1.2 Organs of the SCA and their Competencies The organisational structure of the SCA is composed of: 1. a board of directors, and 2. an administrative system. To perform its duties, the SCA may seek the assistance from suitable third parties. The SCA’s affairs and conduct of business are governed by its board in accordance with the provisions of the Law and regulations. In particular, the board is required to: 1. Collect information and complaints relating to the market or brokers and take the appropriate decisions based on the information received. This includes initiating investigations and imposing penalties in accordance with the provisions of the Law and the regulations. 2. Approve the SCA’s annual budget. 3. Appoint one or more auditors for the SCA and determine their fees. The auditors have to be chosen from the statutory auditors listed as practising auditors. 9 4. Temporarily suspend trading in the securities market, in the shares of any of the listed companies, or in any other securities, upon the occurrence of exceptional circumstances or circumstances threatening the proper and regular working of the market. 5. Freeze, suspend or reinstate rules and regulations relating to the market and its operations. 6. Ensure that any natural or juristic persons that has a connection with activities in securities, publicly discloses information related to their activities. 7. Set and amend scales for salaries, increments, allowances, bonuses, privileges and any other entitlements of employees in the SCA. 8. Define regulations for the SCA’s employees. 9. Issue resolutions required for the implementation of the Law. 2.1.3 Administration The chairman of the board is the head of the SCA. The chairman, or their deputy, represents the SCA to third parties and before the courts. The chairman, or their deputy, invites the board to meet, presides over the meetings, directs the discussion, and issues the resolutions appointing experts, consultants and office-holders of the special and the first grades, terminating their services with the Authority and all other matters in connection with them. The board delegates any of its competences to its chairman, and the chairman of the board may delegate any of their competences to their deputy or to any member of the board or to the chief executive, provided that the delegation is specific and in writing. The deputy chairman shall, as a matter of course, take the place of the chairman in their absence, when they are unable to perform their duties or when their post becomes vacant. The board shall convene, at least once every two months, or more often when required, on the chairman’s invitation. The invitation shall be sent to the members, in writing, in sufficient time prior to the date of the meeting, accompanied by the agenda. The board shall also meet upon request by at least four members. In case of an emergency, the invitation may be sent by any means of communication. A meeting of the board is valid if attended by the majority of its members, including the chairman or their deputy. Resolutions are passed by a majority of the votes of those present. In the event the vote is equal, the chairman or their deputy has the deciding vote. Voting by proxy or by letter is not permitted. The chairman directs the proceedings, maintains order, oversees the process of voting when resolutions are being passed, and announces the results thereof. The deputy-chairman shall take the place of the chairman in their absence. In exceptional cases where quick decisions need to be taken, and it is impossible to hold a meeting of the board, the chairman may take the requisite decision. They will need to present their decision to the board at the earliest opportunity for a final resolution. The board may affirm, amend or revoke the decision. 10 The Regulatory Infrastructure The board may form permanent or interim committees and determine their competencies. The 1 committee is formed from members of the board. The board and its committees may invite any expert outside party to attend a meeting on a specific issue. They are invited for their experience and knowledge, but they do not have a vote in the deliberations. The board may form advisory and other committees as required and in particular in the following areas: 1. Proposing of ways and means to develop the working of the market. 2. Evolving and determining of the regulations necessary to combat fraud, deception and influence on the working of the market. 3. Determining of all requirements relating to publication, disclosure and transparency. The board specifies how committees are created and how they exercise their competencies. The minutes of each board meeting are approved by the board and signed by the chairman and the minute taker. The resolutions passed and the names of those present and those absent with and without excuse are recorded in the minutes. They shall be entered in a special register for that particular purpose. The SCA is supported by an administrative function headed by a chief executive appointed by the board. The chief executive reports to the chairman of the board. They, or anyone acting on their behalf in their absence, is responsible for the appointment, termination, promotion of employees of the second grade and below as well as the awarding of bonuses and all other matters in connection with personnel issues. The SCA’s employees are subject to their own regulations, issued by the board, in which their salaries, increments, allowances, bonuses, privileges and any other entitlements are specified. The chairman of the board defines the SCA’s organisational structure and internal regulations, including the competencies of the departments and the sections therein. The administrative system comprises a number of departments, under the direction of a manager appointed by the board on the nomination of its chairman. Among such departments are: Licensing and Disclosure Department Follow-up and Inspection Department Systems and Information Department Administrative and Financial Affairs Department Legal Affairs Office. 2.1.4 Finances The SCA’s fiscal year commences on 1 January and runs until the end of December each year. It is the responsibility of the chief executive to prepare the draft budget and submit it to the board for approval at least one month before the commencement of the new fiscal year. The approved budget is then issued as an annex to the general budget of the State. 11 The chief executive is also required to prepare the SCA’s final accounts, within the 90 days following the end of the fiscal year, and present them to the board, supported by the auditor’s report. The auditor may, at any time, have sight of the SCA’s records and financial documents. The auditor may request any information deemed necessary to ascertain the SCA’s assets and liabilities. If the auditor is prevented from performing his duties, or is not able to carry them out fully, this will be documented in a report to be submitted to the board. The SCA is required to keep regular books of account in order to monitor its operations and reflect its true financial position in accordance with the bases of accounting employed in the State. 2.2 Market Licensing and Supervision Learning Objective 1.2.2 Understand the regulations as to market licensing and supervision (Cabinet of Ministers Resolution 2000–11 dated 3 July 2000): conditions; applications; board’s powers No market may undertake the activity of trading in securities and commodities in the State unless licensed by the SCA. 2.2.1 Conditions For the granting of a licence in any market, the following conditions need to be met: 1. It is in the form of a public institution or a public company. 2. It occupies an appropriate building fitted out with the technical equipment necessary to conduct its activity electronically. 3. It is electronically linked with the State’s other markets so as to give effect to a common trading system between the markets. 2.2.2 Applications Market licence applications shall be submitted to the Authority in the prescribed format, supported by the following documents: The local resolution establishing the market. A statement of the names of the members of the market’s board of directors, with, from each of them, the following information: 1. an acknowledgment, signed by the member stating therein that they are not a member of the board of directors of a public joint-stock company, and that they are not a partner in, or a representative of, a financial brokerage company 2. a written declaration made by them to the SCA as to the securities owned by them or by their spouse and minor children, and also the holdings of their spouse and minor children with any broker 12 The Regulatory Infrastructure 3. an undertaking by them to declare, in writing, to the SCA any change occurring in what they 1 have previously declared regarding securities owned by them or by their spouse and minor children or via a broker within one week, at most, from the date they become aware of the change. A statement in the name of the market’s director general and his deputy, with accompanying submission from both of them, of the following: 1. a written declaration made by them to the SCA as to the securities owned by them or by their spouse and minor children and also their holdings and the holdings of their spouse and minor children with any broker; 2. an undertaking by them to declare, in writing, to the SCA any change occurring in what they have previously declared as to the securities owned by them or by their spouse and minor children, and also as to their holdings and the holdings of their spouse and minor children with any broker, within one week, at most, from the date they become aware of the change. The organisational structure of the market and a statement of its specialist technical and administrative organs. The internal regulations of the market which indicate the manner of appointing its director general and his powers, the procedure for calling meetings of the board of directors of the market, the place, quorum and validity of meetings and passing of resolutions. The electronic registration system for trading, deposit, clearing, and settlement operations and the capacity for electronic linking with the other markets in the State. The SCA will examine the licence application within a period not exceeding 15 days from the date of submission of the application. If the application is complete, a recommendation shall be made as to the placing of it before the board to take a decision thereon; if not, the concerned parties shall be notified of the necessity of completing the application within a period not exceeding 15 days from the date of notification. 2.2.3 Board’s Powers The board shall take a decision on the application within a period not exceeding 30 days from the date the complete application was placed before it. The board may, before determining the application, request any particulars it deems necessary in order to make its decision. The concerned parties will then be notified of the board’s decision within a period not exceeding one week from the date it was issued. If the decision of the SCA is to reject a licence application, it must state reasons. The applicant for the licence shall have the right to re-submit the application when the reasons no longer exists. The SCA may, in co-ordination with the markets, conduct inspections and investigations necessary to ensure that the legal regulations are being applied. It will first define the scope of the investigation, and designate the person to conduct it on its behalf. The SCA may also receive information and complaints made relating to either a market or broker activity, conduct the necessary investigation, require any person to submit a written statement as to the circumstances and factors relating to the contravention which is the subject of the information or complaint, and take appropriate decisions. 13 The inspection team appointed by the SCA may enter the market and brokers’ offices during working hours, have sight of records and documents, and require that it be provided with any document or information it deems necessary to perform its task. During the course of investigation, the SCA may order the party under investigation not to dispose of the securities in their possession and to refrain from withdrawing any funds or securities deposited with another party. Investigation and inspection are confidential. The market shall provide balance sheet, profit and loss account and annual financial statements certified by an auditor entered on the roll of practising auditors within one month from the end of its financial year. These reports, and any other information, will be provided to the SCA as it requests. The SCA may adjudicate upon appeals submitted to it against decisions of the board of directors of the market relating to the imposing of penalties by way of warning and monetary fine. The board may resolve, by a majority of its members present, temporarily to halt trading in the securities market, or the shares of any company, or transactions in any securities, upon the occurrence of exceptional circumstances or that which threatens the proper and regular working of that market. The board may also resolve, by a majority of its members present, to freeze, suspend or bring back into force any rules or regulations relating to the market or any of its operations. 3. SCA Resolutions 3.1 Regulations for Securities and Commodities Markets Learning Objective 1.3.1 Know the regulations that apply to a securities and commodities market licensed in the UAE (Regulations as to the functioning of the market SCA regulation 2001–3 dated 29 April 2001): general provisions; establishment and management; membership; trading; finances 3.1.1 General Provisions No market is permitted to conduct the activity of trading in the State unless licensed by the SCA. Each market is required to be established by a resolution by the competent local authority, and to be managed by a board of directors constituted by resolution of such authority, provided that none of its members is a member of the board of directors of a public joint-stock company or of a broker. Each market must have a director general and a deputy to the director general, assisted by a sufficient number of officers and administrative staff. 14 The Regulatory Infrastructure Before granting a licence to any market, the following conditions must be satisfied: 1 1. It is in the form of a public institution or a public company. 2. It occupies an appropriate building equipped with the technology necessary for its activity to be conducted electronically. 3. The market applying for the licence has its system linked electronically with the other markets in the State, so that there is set in place a common trading system among the markets. The market is required to make the arrangements necessary to secure the proper performance of the electronic data processing system and the system for recovery of the data saved in it in case of system failure. Each market operates under the supervision and control of the SCA. The SCA may, in co-ordination with the markets where required, conduct inspections and investigations necessary to ascertain the application of the Law and regulations, provided that the scope of any investigation is specified and the person conducting it is designated by the SCA. Markets are required to enter in their records all transactions effected in listed securities. Any transaction in securities listed in the market is null and void unless entered in accordance with the provisions of the Law and the regulations. Unless proved to the contrary, entries registered in the market’s records, whether entered manually or electronically, and any documents issued by the market, are deemed legal evidence of the trading in, and ownership of, the securities on the date of such records or documents. In the event of a dispute between transacting parties in the market in the field of securities and commodities, the parties can choose to enter into arbitration. If this route is chosen, then the arbitration regulations issued by the SCA are applied. 3.1.2 Establishment and Management The members of the market’s board of directors, its director general and his deputy are subject to the constraints and conditions stated in the provisions of the law and related regulations. The market’s internal regulations are required to specify the procedure for calling its board of directors to meet, the place of the meeting, the quorum for the validity of the meeting, the passing of resolutions and the remuneration of the members. The market’s board of directors must be sufficiently competent to deal with the market’s affairs and to take, within the limits of general policy, the steps necessary to achieve the objectives for which it has been established. In particular, the board of directors must have the competence to: 1. appoint the market’s director general and his deputy, and to determine their powers 2. establish the market’s organisational structure, the internal regulations and all administrative rules and instructions 3. draw up the necessary proposals in relation to the amending of the regulations issued pursuant to the provisions of the Law, and to present them to the SCA 15 4. monitor trading transactions in securities and commodities, so as to ensure justice between transacting parties 5. present reports and data to the SCA and to issue the press releases necessary to secure transparency and disclosure 6. approve the annual balance sheet of the market’s income and expenditure 7. levy penalties on brokers pursuant to the provisions of the law, and to recommend to the SCA the removal of them from the register of licensed brokers 8. consult with the SCA in respect of the fees charged in implementing the provisions of the Law and related regulations 9. handle applications for the entering of brokers and the listing of securities in the market 10. deal with any other matters to ensure the proper and regular working of the market. The market’s board of directors may delegate some of its powers to the market’s director general or their deputy. To achieve the objectives of the market, the board of directors may exercise the following powers: a. To establish specialist technical organs for the market to perform its tasks, including: i. an organ for trading, clearing and settlement ii. an organ for the monitoring of prices iii. an organ for monitoring and investigation iv. an organ for research and studies v. financial and administrative organs. b. To work to develop, train and render qualified the necessary cadres in accordance with the most modern technical and administrative methods. c. To form permanent or interim specialist committees. 3.1.3 Membership As defined in Chapter 1, membership of the market is obligatory for the following entities: 1. Brokers licensed in accordance with the law. 2. Joint-stock companies whose securities are listed in the market. 3. Any other entity whose securities are listed in the market. Each market is required to prepare a membership register in which members are entered. The SCA requires to be notified within one week of a member being entered on the market’s register. Members of the market are subject to the instructions of the market, the provisions of the Law and the related regulations. The members of the market who have paid the registration and renewal fees constitute its General Assembly. Each member has one vote in the meetings of this assembly. Its meetings will be attended by a representative of the SCA as an observer. The General Assembly is required to be competent to monitor general conditions in the market, and to suggest ways to enhance efficiency therein or eliminate impediments to its working. Its views on these matters are submitted to the SCA through the market’s board of directors. 16 The Regulatory Infrastructure The market’s board of directors, in co-ordination with the SCA, lay down the rules and procedures as 1 to how notice is given of meetings of the General Assembly and how resolutions are passed, as to the powers given to it and the duties placed upon it, and as to all administrative and financial matters relating to the General Assembly. The market’s board of directors is required to, with the approval of the SCA, lay down a code of professional conduct which shall be applied to brokers, and provisions for monitoring them. The brokers must be subject to a regime of inspection on a periodical basis or upon request by a concerned party. The inspection shall be conducted in co-ordination with the management of the market as appropriate. 3.1.4 Trading Trading in securities must be carried out on the floor of the market at least five working days in the week, excluding official holidays. Trading must be carried out for at least two hours in the day. Each market must advise the SCA of the days and hours of work it approves. The markets may, after obtaining the Authority’s consent, vary such days and hours. The market must provide an electronic trading system which ensures the following: 1. The automatic stopping of purchase orders which exceed the limits of the broker’s bank guarantee or reach the limit of a special order referred to below. 2. The enabling of all companies and entities whose securities are listed in the market, and their registrars, to view the register of their own shares. With the exception of trading relating to special orders, trading in the market must be carried out through an electronic trading system made available by the market and in accordance with the provisions as to trading in the Law and its regulations and instructions. A special order is defined as any order approved in advance by the market for a securities transaction in excess of 80% of the amount of the broker’s bank guarantee. The market defines the opening hours for the trading floor and the clearing operations, the rules as to admittance, and the instructions to be observed by those present. The market is required to allocate a single number to each investor, and also assign one trading account with any broker account. A trading account may, however, be opened in the names of two or more investors. Furthermore, with the approval of the SCA, the market may assign more than one number to an investor where required and trade through an ‘omnibus’ account that includes more than one investor. Clearing and settlement operations in the market must be carried out on the basis of delivery against payment of the price. The market’s board of directors may specify the interval between the effecting of a trading transaction and the completion of settlement, provided that this will not be more than two working days after the trade date. 17 The director general of the market may cancel an executed transaction after a written request from the two brokers to the transaction is submitted to him. His consent to such cancellation will be conditional upon there being serious reasons justifying the cancellation and on the feasibility to reverse the transaction. 3.1.5 Finances Each market is financed from the following sources: 1. Listing fees and annual fees levied on listed companies and on entities whose securities are listed, or on brokers. 2. Fees levied on trading, and fees for the services rendered by the market. 3. Any fines levied on brokers, or on companies or entities whose securities are listed for trading. The market’s fiscal year shall commence on the first of January and run until the last day of December of the same year. The market is required to provide the SCA with the balance sheet, the income and expenditure account, and the annual financial statements audited by an accredited auditor, within one month from the end of its financial year. 4. Corporate Governance Corporate governance is all about the way corporate entities are run. Broadly, it is the set of regulations, criteria and procedures that ensure discipline in managing companies. This is achieved by determining responsibilities and obligations of the directors and executive management of a company, taking into consideration the protection of shareholders’ rights and other stakeholders’ interests. The OECD Principles of Corporate Governance define it as: ‘a set of relationships between management, board, shareholders and stakeholders providing structure through which the objectives of the company are set’. In early 2020, the chairman of the Securities and Commodities Authority issued Board Resolution No. 03 of 2020 which adopted the Corporate Governance Guide for Public Joint-Stock Companies. This resolution introduced new corporate governance rules for public joint-stock companies in line with international best practice with the aim of promoting accountability, fairness and transparency. 18 The Regulatory Infrastructure 4.1 The Corporate Governance Guide for Joint-Stock 1 Companies Learning Objective 1.4.1 Know the terms of the joint-stock companies governance guide: the main pillars (introduction), guide principles and objectives (Article 2); responsibilities (Article 4) 4.1.1 The Pillars of the Guide The Corporate Governance Guide provides the framework necessary for regulating the affairs of public joint-stock companies. The Securities and Commodities Authority supervises the guide in its capacity as the regulator of listed companies. The guide is formulated in a simple and clear way, focused on guiding companies by providing a set of controls and rules that ensure institutional discipline in company relations and management. The main pillars of corporate governance according to the guide are accountability, fairness, disclosure, transparency and responsibility. The guide’s framework complies with the international best practice in terms of defining the responsibilities and duties of the members of the board of directors and executive management. It also serves to protect the rights of shareholders and other stakeholders, and it should contribute towards improving corporate sustainability. Guide Principles and Objectives The guide is based on the following principles of corporate governance: Accountability towards all shareholders and stakeholders, directing the board to develop strategy, supervise, guide and control the way the company operates. Equity – ensuring fair treatment for all shareholders, including minority shareholders, and protecting their rights. Transparency and disclosure – the company must ensure that accurate and timely disclosures are made of all material matters, including its financial affairs, performance, ownership of its shares and governance in an accessible manner to all interested parties. Responsibility – the company must recognise the rights of other stakeholders in accordance with laws and regulations, and encourage cooperation between the company and stakeholders in establishing sustainable and solvent companies. The objective of the guide is to develop an effective legal and regulatory framework to regulate the company affairs, and aims in particular to achieve the following: Develop a framework to address and protect rights of all stakeholders. Determine the responsibilities of the board and the executives administering the company. Strengthen the role of the board and its committees and developing their capabilities to enhance company decision-making. 19 Ensure transparency, neutrality and equity in the capital market, its transactions and working environment, and enhance its disclosure. Provide effective and balanced processes and procedures for dealing with conflicts of interests. Strengthen mechanisms of accountability and control for the administration of the company and its employees. Ensure the application of effective mechanisms for risk management, internal controls and procedures of the company. Support the efficiency of the audit of the company and its instruments. Raise the awareness of companies in relation to the concept of professional behaviour and encourage ethical behaviour. Ensure that the company applies an investor relations policy that supports regular, effective and fair communication with shareholders. 4.1.2 Responsibilities for Implementation Article (4) of the Corporate Governance Guide makes it clear that the board of directors takes the primary responsibility for the implementation of the guide. It states that the board is responsible for the implementation of the principles and rules of corporate governance, monitoring the company’s adherence to those principles and rules and making any necessary amendments. The company must maintain the documents which will evidence the way the company is governed, including all minutes, documents, reports and other papers as necessary. These should be held at the company’s headquarters for a period not less than ten years, including minutes of the general assemblies, board meetings and those of its committees. In the case of a judicial lawsuit (filed or to be filed against the company) or a continuous claim or investigation related to these minutes, documents, reports and other papers, the company must maintain such documents until the end of the lawsuit, claim or continuing investigation. 4.2 Gifts, Conflicts and Related Party Transactions Learning Objective 1.4.2 Know the regulations regarding: gifts (Article 30); conflicts of interest (Articles 32 & 33); related parties (Articles 34–39) In order to avoid even the appearance of a conflict of interest between a board member and the company, the Corporate Governance Guide includes provisions in relation to gifts, conflicts of interests generally and transactions with related parties. The rationale and requirements are detailed below. 4.2.1 Gifts A board member accepting gifts from persons or authorities may lead to a conflict of interest or the impression of a conflict. So, where the party giving the gift does so in circumstances where it may be concluded that it was intended to influence, or may influence the board member in the performance of tasks on behalf of the company, the Corporate Governance Guide says it should not be accepted. This 20 The Regulatory Infrastructure does not prevent accepting objects of symbolic or real value of AED 500 or less, or entertainment of 1 symbolic or simple value which is not related to any special transaction or activity of the company. 4.2.2 Conflict of Interests Management If a board member has a joint interest or a conflict of interest with the company in a deal or transaction submitted to the board for a resolution, that board member must inform the board and record the same in the minutes. Furthermore, the board member should not participate in the voting on the decision relating to the deal or transaction. If a board member fails to inform the board in accordance with the above, the company or any of its shareholders may resort to the competent court to invalidate the contract or order the member who acted in contravention of these provisions to return to the company any profit or benefit obtained as a result of entering into this contract. If it is not entirely clear that there is a conflict of interest, the board member who is the subject of the potential conflict, should disclose these circumstances to the chairman or designee, who decides whether or not there is a conflict of interest. The company must maintain a register of conflicts of interests in which the cases are recorded together with the measures taken. The board secretary should record the interest conflict in the related board minutes. In conflict cases, the remaining board members must consider whether it is appropriate for the board member involved in the conflict issue to participate in discussing that item or not. If they decide that it is not appropriate for the member to participate, they may ask the board member to leave the meeting room during the discussions. The board member is not allowed to use personal influence on the issue whether in or outside the meeting. The board member should not vote on the decision. 4.2.3 Insiders Register In a similar way to conflicts management, the company’s board is expected to issue written rules regarding the transactions of the board members and its employees, collectively referred to as ‘insiders’, in securities issued by the company, the parent company, its subsidiaries or related companies. They are also expected to assign a department of the company, an internal committee, a special committee, or whoever the company deems it suitable to: 1. Prepare a special and complete register for all insiders, including persons who may be considered as temporary insiders who have the right to access the company’s internal information prior to publication. The register must also include prior and subsequent disclosures of insiders. 2. Manage, follow up and supervise the transactions of the insiders and maintain details in the register. 3. Notify the SCA and the market of an updated list of insiders at the beginning of each fiscal year and any amendments thereto during the fiscal year. 4. Submit a copy of the Insiders Register to the SCA on request. 5. Comply with any other requirements specified by the SCA. 21 4.2.4 Transactions with Related Parties The Corporate Governance Guide defines a ‘related party’ as the chairman and other members of the company board, plus members of the senior executive management of the company, employees of the company, and the companies in which any of these persons holds 30% or more of its capital, as well as subsidiaries or sister companies or affiliate companies. Deals done between a company and related parties (related party transactions) need to be handled carefully to ensure nothing untoward occurs. So, the Corporate Governance Guide specifies that a company must not enter into transactions with related parties without the consent of the board – in cases where the value of the transaction does not exceed 5% of the company’s capital – and also without the approval of the general assembly where the 5% percentage threshold is met or exceeded. Furthermore, for larger transactions that exceed 5% of the issued capital, the transaction must be evaluated by an assessor accredited by the SCA. Unsurprisingly, the related party who has an interest in the transaction must not participate in voting on the terms of the decision taken by the board or the general assembly in respect of that transaction. In the event of any significant change to the terms of the transaction after approval, another approval must be obtained from the board or the general assembly, as the case may be. Again, where the transaction exceeds 5% of the issued capital, it must be evaluated again and its conditions reviewed before its conclusion by an assessor accredited by the SCA at the company’s expense. The related party and complicit board members may be liable for damages to the company if transactions with the related parties are concluded in contravention of these requirements, or is otherwise proven to be unfair or involves a conflict of interests and incurs damages to the shareholders. Transactions that fall under the company’s normal business and do not grant a board member any preferential conditions are not considered transactions with related parties. However, the board member involved in the transaction should disclose such transactions to the board, and the remaining board members should review whether it is appropriate for the board member involved in the transaction to participate in the discussion of the item in the board meeting. 4.2.5 Related Parties Record The company must maintain a register for related parties where the names of such parties shall be recorded together with their transactions, the details and actions taken in relation thereto. The company must provide documents of the transactions with related parties and the nature of those transactions, volume, and details of each transaction, and inform the shareholders of such transactions in the general assembly. 4.2.6 Company Disclosure of related Parties’ Transactions In cases of entering into transactions with related parties, the chairman must provide the SCA with a notice which includes the data and information of the related party, the details of the deal or transaction, 22 The Regulatory Infrastructure the nature and the benefit of the involvement of the related party in the deal, together with a written 1 confirmation that the terms of the transaction or the deal with the related party are fair, reasonable, and in favour of the company’s shareholders. 4.2.7 Related Party Disclosures Before entering into a transaction between a related party and the company, the parent company, or an affiliate company, the related party must disclose, in a written letter addressed to the board, the nature of the transaction, conditions and all substantial information about the related party’s share or its stake in the two contracting companies and the related party’s interest or benefit, which the board is required to immediately disclose to the SCA and the market. The details of the transaction must also be listed in the annual financial statements submitted to the general assembly, and published on the website of the market and the company. 4.2.8 Access to Transactions Concluded with related Parties If a company enters into transactions with related parties, a shareholder who owns 5% or more of the company’s shares is entitled to the following: 1. Review the company records and any documents relating to those transactions. 2. File a lawsuit before the competent court regarding the transactions concluded with related parties to compel the parties of the transaction to provide all information and documents relating to those transactions, whether directly to prove the facts set out in the case or relevant to it or to lead to the discovery of information that will help in the detection of the facts. 3. If it is proven to the competent civil court that the transaction is unfair or involves a conflict of interests and causes harm to the rest of the shareholders, the court may cancel the transaction and oblige the related party to render the profit or benefit gained to the company, in addition to compensation if harm is proven against the company. 5. Codes of Conduct Learning Objective 1.5.1 Know the CISI Code of Conduct Professionals within financial services owe important duties to all their stakeholders including clients, market participants, their profession, professional bodies, regulators, colleagues as well as to wider society. Where these duties are set out in law or regulation, members of the Chartered Institute for Securities and Investment (CISI) should comply with the requirements in both letter and spirit. 23 Members of CISI are also required to meet the standards set out within the CISI’s Principles, which impose an obligation on members to act at all times not only in compliance with the rules, but also to support the underlying purpose and values of the Institute. Each Principle specifies the duties owed by members to one or more stakeholders who may be impacted by their actions. There may be situations where professionals are faced with making a decision where the correct course of action is not immediately obvious. In addition to referring to the Code, consideration of the following could help to decide the right course of action. Clear & Honest – have I told no lies or ‘half-truths’ to any party involved in my reaching my decision? Impartial & Open – is everyone affected by my action or decision aware of the consequences? Straightforward & Transparent – have I made sure that my action or decision will not result in any party being unknowingly disadvantaged or unduly advantaged? Informed & Fair – have I considered the interests of my potential stakeholders and not been misleading when making my decision? Principles Stakeholders Personal Accountability – to strive to uphold the highest levels Self, Clients, of personal and professional standards at all times, acting with Regulators, integrity, honesty, due skill, care and diligence to avoid any acts, 1. Colleagues, Market either in person, in a remote working environment or digitally which Participants, Firm, may damage the reputation of your organisation, your professional Profession, Society body or the financial services profession. Client Focus – to strive to uphold the highest levels of personal and professional standards at all times, acting with integrity, honesty, due skill, care and diligence to avoid any acts, either in person, in 2. Clients a remote working environment or digitally which may damage the reputation of your organisation, your professional body or the financial services profession. Conflict of Interest – being alert to and actively manage fairly and effectively any personal or other conflicts of interest, obeying Clients, Market 3. legislation and complying with regulations to the best of your ability, Participants, ensuring you are open and cooperative with all your regulators, Regulators challenging and reporting unlawful or unethical behaviour. Respect for Market Partners – to treat all counterparties and business partners with respect, to observe proper standards of Clients, Market 4. market integrity, good practice, conduct and confidentiality required Participants to maintain the highest level of mutual trust. Professional Development – to strive continually for professional Profession, Clients, 5. excellence, committing to Continuous Professional Development Colleagues (CPD) and promoting and supporting the development of others. 24 The Regulatory Infrastructure Principles Stakeholders 1 Aware of Capabilities – to decline to act on any matter about which you are not competent or qualified unless you have access to such Clients, Profession, 6. advice or assistance to carry out the work in a professional manner, Market Participants taking into account the nature of the individual mandates given by your customers and counterparties. Society, Colleagues, Respect Others and the Environment – to treat everyone fairly and Clients, Regulators, with respect, supporting opportunity for all, embracing diversity and 7. Market Participants, inclusion and ensuring that the environmental impact of your work Profession, is considered. Professional Body Speak Up & Listen Up – to be active in speaking up and encouraging others to do so by listening up, promoting a safe 8. Society, Colleagues environment for all and recognising the responsibilities you have to the communities in which you operate. 25 End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. What are the objectives of the SCA? Answer reference: Section 1.1 2. With exception of the chief executive, how long is the period that SCA board members hold the role when appointed? Answer reference: Section 1.1.1 3. How often should the board of directors report on the markets’ activities to the Cabinet of Ministers? Answer reference: Section 1.1.2 4. Where does the funding for the SCA come from? Answer reference: Section 1.1.3 5. What is the aim of the disclosure and transparency rules? Answer reference: Section 1.4 6. What are the powers of the SCA? Answer reference: Section 2.1.1 7. What documents need to accompany an application from a market? Answer reference: Section 2.2.2 8. How quickly does the board decide on an application from a market? Answer reference: Section 2.2.3 9. What conditions must be satisfied before a market is granted a licence by the SCA? Answer reference: Section 3.1.1 10. How is a special order defined in terms of trading? Answer reference: Section 3.1.4 11. List four of the aims of the Corporate Governance Guide. Answer reference: Section 4.1.1 12. Who has the responsibility of ensuring the implementation of the Corporate Governance Guide? Answer reference: Section 4.1.2 13. What should the Insiders Register include in relation to temporary insiders? Answer reference: Section 4.2.3 26 The Regulatory Infrastructure 14. What is obligation imposed on members of the CISI to uphold alongside the rules in relation to 1 compliance? Answer reference: Section 5 15. Name the stakeholders under Principle 7 - Respect Others and the Environment? Answer reference: Section 5 27 28 Chapter Two 2 Associated Market and Securities Legislation and Practice Introduction 31 1. Regulatory Controls for Financial Activities and Services 31 2. Brokers 37 3. Trading for Clients in Foreign Markets 44 4. Separation of Accounts 45 5. Dormant Accounts 47 6. Financial Consultancy and Financial Analysis 48 This syllabus area will provide approximately 10 of the 100 examination questions 30 Associated Market and Securities Legislation and Practice Introduction Building on the regulatory infrastructure introduced in the first chapter, this chapter looks at a variety of requirements surrounding licensed activities undertaken by brokerage firms and firms involved in 2 financial consultancy and analysis. 1. Regulatory Controls for Financial Activities and Services The SCA published a decision R/T 123 in 2017 (Regulatory Controls for Financial Activities and Services) that outlines the expectations for licensed firms and markets to abide by certain regulatory principles and requirements. These are detailed in the following sections under the sub-headings of fitness and propriety, honesty and integrity, outsourcing and separation controls. 1.1 Fitness and Propriety Learning Objective 2.1.1 Know the requirements relating to: fit and proper criteria (Article 1); financial capability (Article 2); competence (Article 3) The fit and proper criteria are intended to determine the financial capacity and competence of the company or entity applying for licence or already licensed. However, given that a firm is a collection of individuals, this will include a determination of the fitness and propriety of other relevant persons such as the firm’s directors, partners, and employees. 1.1.1 Financial Capacity Financial capacity for both the firm and the relevant individuals is one of the most important criteria in any assessment of fitness and propriety. It is evaluated by ensuring that the company or the relevant persons have not defaulted in meeting their financial obligations based on the following evaluation principles: 1. For the company: Meeting the financial obligations related to the licensing conditions such as capital requirements or the provision of a financial guarantee. Commitment towards payment of bank loans and financial obligations arising from conducting the activity or under a court order or judgment. Compliance with the financial solvency criteria issued by the concerned authorities in the State (namely the SCA and the Central Bank). No frequently bounced cheques. The availability of a credit rating or credit assessment of the company. 31 No receiver has been appointed over the assets of the company, even if it is not subject to liquidation procedures. Never stopped the payment of commercial debts even if this is not associated with bankruptcy declaration. 2. For the relevant persons: Enjoying full legal capacity. Never stopped the payment of commercial debts even if this is not associated with bankruptcy declaration. The relevant persons should have been rehabilitated in the case of any bankruptcy declaration. Commitment towards the payment of bank loans for commercial purposes and the financial obligations arising from a court order or judgment. No frequently bounced cheques relating to business activities. 1.1.2 Competence The competence level of the company and the relevant persons is evaluated by considering the requirements for operation in the capital markets in the State. This shows the minimum needed conditions to license a company and evaluates the technical and technological systems, or those conditions related to the relevant persons such as their educational and professional qualifications, past practical experience and gained skills, based on the following evaluation principles: 1. For the company: Commitment to provide and constantly update effective internal regulations and internal control and risk management systems as well as compliance with the rules of separating the activities in a manner to ensure that the company performs its activity in a sound legal and regulatory manner. Commitment to provide preventive, corrective and motivating procedures on a timely basis, as well as precautionary measures to manage conflicts of interests and functions. Commitment to appoint competent and experienced employees, and having the ability to direct and lead them; and making decisions in a sound manner in accordance with the applicable legislation. The ability to perform the licensed activities with competence and effectiveness, and compliance by the employees with the applicable legislation. Maintaining the customers’ interests and using professional diligence to improve and upgrade the quality of services to achieve customers satisfaction. 2. For the relevant persons: Suitability of the university qualification or specialised professional certificates, and their relevance to the nature of functions undertaken. Availability of practical experience and suitability given the nature of the job. Continuous professional development. Familiarity with the legislation related to the functions of the SCA, the markets and the profession in general. 32 Associated Market and Securities Legislation and Practice 1.2 Honesty and Integrity, Compliance and Whistleblowing Learning Objective 2 2.1.2 Know the requirements relating to: honesty and integrity (Article 4); compliance (Article 5); whistleblowing (Article 7 No 10) 1.2.1 Honesty and Integrity This is a personal criterion connected to each of the relevant persons behavioural standards and ethical principles. This criterion is evaluated based on the following principles: Adherence to professional ethics and conduct. Observance of honesty, sincerity and integrity in the performance of duties and responsibilities using the required professional diligence (due diligence). Refraining from engaging in any business that conflicts with the interests of the company or the clients, or that affects the functioning and order of the market, or involving illegal or unacceptable acts as per the professional standards or the instructions of the company. Maintenance of confidentiality of information and data related to the firm’s clients and the individual’s role. Practising the functions that are allowed to be combined after obtaining the SCA approval, and without any conflict in interests and functions. 1.2.2 Compliance The level of compliance and adherence by the company or the relevant persons with the applicable legislation also needs to be evaluated. This is done based on the following principles: Compliance with the legislation, including the laws, regulations, controls, circulars and decisions whether those relate to the practice of the activity or are otherwise applicable within or outside the State. The professional record issued by the SCA or any other supervisory or regulatory authorities within or outside the State should be free of administrative penalties. No lawsuits, reports or prosecution investigations, whether within or outside the State, in relation to honesty and integrity. No judgment or court order has ever been awarded by the courts or the prosecution against the company or the relevant persons in relation to fidelity, fraud, cheating or otherwise which would damage the reputation of the market, its member, traders or others. The name of the company/person has not been listed on the sanction lists issued by the United Nations and other international organisations, especially those concerned with anti-money laundering and counter terrorism funding. 33 1.2.3 Whistleblowing The company must develop a written policy as part of its administrative by-laws to encourage its staff to report (typically referred to as ‘whistleblowing’) to both the firm’s senior management and the SCA any material violations that may come to their attention while performing their functions. This whistleblowing policy must include the mechanism and basis to protect the whistleblower and to ensure that they are not harmed, as well as the policies that should be followed to handle the reported violation in terms of maintaining the confidentiality of the whistleblower’s name, and the entity in charge of following up and addressing the violation. 1.3 Outsourcing Learning Objective 2.1.3 Know the regulations regarding outsourcing (Articles 8, 9, 10, 11) Outsourcing occurs when a firm authorises another professional corporate person (the outsourced contractor) to perform on its behalf certain work or some of the administrative or technical functions that support the core business for which it was licensed. The outsourced contractor might be within or outside the State (cross border outsourcing) For licensed firms only the following tasks and functions can be outsourced: Internal control work. Functions of the discipline officer. Risk management. Internal audit. Human resources. Accounting. Information technology (IT). Work related to mutual funds, provided that the outsourcing would not result in transferring all the functions of the management company/board of directors to the outsourced contractors. Other functions or tasks approved to be outsourced by the SCA. The SCA must be provided with a copy of any outsourcing agreements entered into by licensed firms. Furthermore, any outsourcing must be made under a Service Level Agreement according to the following conditions: a. The agreement must not violate any applicable legislation. b. The agreement must include a clause that allows the SCA to have access to the technical systems, data or documents related to those outsourced tasks or functions at the outsourced contractor. c. The agreement must define the rights, duties, responsibilities and obligations of each party and establish the procedures that maintain the confidentiality of customer information and data. d. The SCA must be informed of any subsequent change or amendment to the agreement. The outsourced contractor must obtain SCA approval if the functions and tasks are provided for more than one company. 34 Associated Market and Securities Legislation and Practice 1.3.1 Obligations on the Company Before entering into any outsourcing agreement, the licensed firm must prepare a study on the following effects of outsourcing: 2 The financial and operational impact, and the potential impact on the reputation of the company in case of failure by the outsourced contractor. The potential impact of using an outsourced contractor on the quality of services provided by the company to its clients. The potential for loss of the company’s clients as a result of the failure by the outsourced contractor. The impact of outsourcing on the company’s ability to meet its obligations and abide by the regulations and laws. The cost of outsourcing. The nature of relationship and the level of association between the company and the outsourced contractor. The outsourced contractor being subject to a regulator similar to the SCA. The difficulty and the time required to provide an alternative outsourced contractor when needed, or in the event of the work or task being returned to be performed by the company. The level of potential risks due to the nature of relationship between the company and the outsourced contractor. The firm should refrain from outsourcing to an outsourced contractor that is subject to a regulator or affiliated to a company that prevents the SCA from obtaining data within the period set by the SCA. More generally, the firm should use due diligence in selecting the outsourced contractor to perform any functions or tasks, including conducting full assessment and examination of the outsourced contractor to ensure its ability and readiness to perform the services or functions assigned thereto subject to the size and type of such functions or tasks. 1.3.2 Responsibility for Outsourced Tasks and Functions It is vital to be aware that outsourcing will not affect the responsibilities and obligations of the company. In all cases, the company remains fully responsible for any failure in performing the duties, responsibilities or work, and for any failure to fulfill the obligations or for violating the applicable legislation. So, in all cases, the board and senior management of the company will be responsible for: a. The results of any outsourcing to any outsourced contractor. b. Ensuring that any outsourcing will not adversely affect the clients’ interests or expose them to risks. c. Ensuring that any outsourcing will not adversely affect the company’s commitment and ability to meet its regulatory obligations. d. Ensuring that any outsourcing will not impede the SCA or the market from performing their supervisory duties. e. Ensuring that policies and procedures are in place to protect the confidentiality of customer information and to prevent the outsourced contractor from disclosing customer data unless in compliance with the legislation. 35 1.4 Separation Controls Learning Objective 2.1.4 Know the regulations regarding financial activities separation controls (Article 12) Separation controls are designed to prevent the likelihood of conflicts of interest inappropriately influencing the activities of licensed firms. Conflicts of interest are circumstances where a situation in which the concerns or aims of two different parties are incompatible – circumstances which would expose a certain interest to risks that the validity and professionalism of the decision made are inappropriately affected by another interest. Separation controls include the separation of activities. This is where a company that provides more than one financial activity, separating the organisational, administrative, technical, and financial aspects to manage the company’s information in a manner that minimises leaks or the flow of information or data and to ensure proper management of cases of conflict of interests. This could include: 1. Separation in terms of the spatial aspect between the departments or sections engaged in different activities, securing the main entrances in each using suitable security measures to prevent unauthorised entry or access to any data or information. 2. Separation in terms of the organisational aspects to ensure that no employee of a particular activity performs another job in any department or section that is engaged in a different activity, excluding the roles that do not involve a conflict of interests with other departments or sections. 3. Development and implementation of technical precautions to ensure that the employees of a particular activity do not have access to the technical or technological systems used to practise other activities licensed for the company, except in cases of inquiries or producing certain reports and in a manner that such access does not give rise to a conflict of interests or conflict of functions. 4. Development of policies and procedures for the separation of activities to be updated whenever necessary. These will include: procedures to prevent any leak of interdepartmental information, including full separation in terms of spatial, organisational and technical aspects among the various activities identification of cases of permitted communication and the information permitted to be shared among the employees working in the licensed activities guidelines explaining the procedures that must be followed by an employee in case they have access to insider information or data relating to the other activities practised by the company making sure that the incentive structure does not allow any employee to receive incentives unless based on their performance and contribution to the completion of the functions directly assigned. refraining from any act that may give rise to a conflict of interests. 36 Associated Market and Securities Legislation and Practice 2. Brokers 2.1 The Brokerage Licence 2 Learning Objective 2.2.1 Know the regulations concerning the licensing conditions for brokers (Chapter 2) Decision No. 27 of 2014 details the SCA regulations surrounding admitting brokers to arrange deals in securities by gaining a licence. The SCA lays down multiple requirements that need to be met to gain a licence, including the following: The applicant must be a legal person incorporated within the State or a branch of a foreign company, provided that its parent company conducts the same activity and is subject to the supervision of a regulatory authority which carries out functions similar to those of the SCA. The activity of the company or branch, or one of its activities, must be brokerage, provided that its other activities are licensed by the SCA and provided that there is no conflict between the activities. The paid-up capital must not be less than AED 3 million for a brokerage company that intends to be just a trading member, and AED 30 million for a brokerage company that intends to be both a trading and clearing member. The requisite financial guarantee must also be provided. The applicant must appoint technical and administrative personnel to conduct the broker-age activity that meet the SCA’s requirements, and have an appropriate office, electronic programs and technical systems to conduct the brokerage activity. Furthermore, the applicant must have both an internal monitoring system to guarantee the laws and regulations are adhered to and a risk management system that includes a risk management operational guide book. The brokerage company must fulfill all of the licensing requirements on a continuing basis. 2.1.1 Technical and Administrative Personnel Each appointee to the technical and administrative team in a brokerage company must be a natural person with full capacity that is fit and proper. The fit and proper includes an expectation of good conduct and behaviour and an absence of the following, unless exonerated: any sentence by a freedom restraining penalty in a crime against honour or honesty being declared bankrupt or stopped paying commercial debts even if this was not related to a declaration of bankruptcy. Members of the technical and administrative team must not hold two positions that are contradictory in their tasks, and the company must notify the SCA of the appointment of the approved employees and of any amendment or change to the termination of their services. 37 2.1.2 Licence Application Licence applications for brokerage

UAE Financial Rules and Regulations Ed3 PDF 2021

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